Hulley v. Russia 2014

“straightjacket” and asks the bailiff to lift the freeze to enable Yukos to pay the syndicate.1428 Respondent criticizes Claimants’ reliance on this letter noting that the letter was sent after the bankruptcy petition was filed.1429

(ii)The Confidential Sale Agreement Between the Western Banks and Rosneft

1132. Claimants argue that, while it was the Western Banks that formally initiated the bankruptcy of Yukos, it was the Russian Federation, acting through Rosneft, that orchestrated the commencement of the bankruptcy. In particular, Claimants place great emphasis on the Confidential Sale Agreement that was entered into between the Western Banks and Rosneft on 13 December 2005. Pursuant to that Agreement, Rosneft agreed to satisfy the outstanding debt owed by Yukos to the Western Banks (over USD 455 million plus interest) in exchange for the Western Banks agreeing to take the steps described in Schedule 8 of the Confidential Sale Agreement, entitled “Application for Bankruptcy.”

1133. Claimants assert that each of Rosneft, on the one hand, and the Western Banks, on the other, fulfilled their respective roles under the Confidential Sale Agreement meticulously. Thus, on 6 March 2006, having completed the other steps contemplated under the Confidential Sale Agreement, the Western Banks filed a petition with the Moscow Arbitrazh Court to declare Yukos bankrupt.1430 On 14 March 2006, the Moscow Arbitrazh Court formally substituted Rosneft in the place of the Western Banks for the purposes of the bankruptcy proceedings.1431

1134. Respondent explains that the Confidential Sale Agreement was concluded between Rosneft and the Western Banks because of the “convergence of their commercial interests”:

The SocGen syndicate simultaneously also sought payment of the same debt from Rosneft pursuant to the 2004 loan guarantee that Yukos had foisted on YNG, which Rosneft then owned. Although Rosneft disputed the validity of the guarantee, Rosneft required forbearance from the same banks on covenant breaches arising from the YNG acquisition, and Rosneft needed the bank’s cooperation for its planned IPO. The convergence of the syndicate’s and Rosneft’s commercial interests resulted in their agreeing that Rosneft

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would pay the syndicate in full, but only after the syndicate had pursued all legal avenues to obtain payment from Yukos, the primary obligor. If Rosneft instead paid, the syndicate’s rights under the A Loan agreement were to be assigned to Rosneft.1432

1135. Respondent disagrees with Claimants that the confidentiality clause in the Confidential Sale Agreement evidences a “conspiracy on the part of the SocGen syndicate to act secretly on behalf of Rosneft, which Claimants improperly equate with Respondent.” Instead, Respondent contends that the confidentiality clause was a standard commercial term “necessary to preserve the possibility that Yukos would pay the SocGen syndicate before Rosneft became unconditionally obligated to do so, and remained in effect only for so long as Yukos’ payment would have discharged Rosneft’s own obligations to pay the syndicate.”1433

1136. Respondent argues that the syndicate “ha[d] been nothing if not patient during this whole process”1434 and that, in its frustrated effort to satisfy the English Judgment, the syndicate in last resort turned to Rosneft for payment under the YNG guarantee.1435 After “a little bit of a dance going on between them,” the syndicate and Rosneft concluded a mutually advantageous deal.1436

1137. Respondent asserts that the syndicate originally pressed Rosneft for payment under the YNG guarantee1437 but eventually came to a commercially sound arrangement with it.1438 Respondent claims that these propositions stand unrebutted.1439

1138. Claimants contend that Yukos “work[ed] closely” with the syndicate until the syndicate received from Rosneft an offer it could not refuse.1440 In the words of Mr. Theede, “banks being banks, that was an easy, low-risk way out of this for them, and so that’s what happened and that’s what they did.”1441 Having said this, Claimants note that “there is no commercial

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rationale for why Rosneft would insist upon the further and highly unusual step that the A Lenders initiate bankruptcy proceedings against Yukos, save for the sake of appearances.”1442

1139. The Parties also disagree when it comes to the significance of the separate and parallel bankruptcy petition filed by YNG (then a subsidiary of Rosneft) on 24 March 2006. According to Respondent, the YNG petition “alone disposes of Claimants’ contention that the bankruptcy filing by the SocGen syndicate had been orchestrated by the Russian Federation so as to allow Rosneft not to ‘appear as the instigator of Yukos’ bankruptcy.’”1443

1140. According to Claimants, Rosneft had decided to “hedge its bets” by filing a separate bankruptcy petition through YNG in the event the court would reject the petition filed by the banks.1444 Claimants further contend that having the syndicate file its petition prior to YNG was “evidently important to Rosneft and the Kremlin’s public relations efforts.”1445 Finally, Claimants argue that the YNG petition refutes Respondent’s argument that Yukos itself caused the bankruptcy by failing to pay the syndicate: “Respondent offers no explanation as to how the Claimants suffered additional damages because it was the Société Générale syndicate who initiated the bankruptcy rather than Rosneft.”1446

(iii)Tribunal’s Observations

1141. Having considered the extensive record and the maze of documents as well as the Parties’ arguments, the Tribunal concludes that while it is undisputed that the Western Banks formally initiated the bankruptcy proceedings, and that Yukos is partly to blame for giving the Banks the incentive to enter into the Confidential Sale Agreement with Rosneft, the role of Rosneft and of Respondent in creating the conditions for Yukos’ bankruptcy cannot be ignored.

1142. Turning firstly to the fault that Yukos bears in this matter, the Tribunal largely accepts Respondent’s arguments that Yukos could have paid the A Loan in full prior to the end of 2005, whether by subordinating the B Loan to the A Loan, allowing the export contracts to continue to operate as security for the Western Banks, or indeed using assets that were placed into the

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Stichtings. It can therefore be said that Yukos is not without fault in connection with the initiation of the bankruptcy, since it contributed to creating conditions that gave the Western Banks every incentive to enter into the Confidential Sale Agreement with Rosneft, and it was pursuant to that Confidential Sale Agreement that the Banks initiated bankruptcy proceedings against Yukos in exchange for payment from Rosneft under the A Loan. As Mr. Theede testified, banks being banks, the solution presented by the Confidential Sale Agreement was “an easy, low-risk way out of this for them.”1447

1143. However, to focus only on these narrow reasons for non-payment of the A Loan, and on the commercial considerations that drove the Western Banks to enter into the Confidential Sale Agreement, is to miss the bigger picture. The Tribunal observes that Yukos was current in its payments to the Western Banks until December 2004, when YNG was auctioned to Rosneft. Had YNG not been seized, therefore, it is reasonable to assume that Yukos would not have had problems repaying the A Loan. By the same token, given the circumstances under which YNG was seized (discussed in Chapter VIII.F of this Award), it stands to reason that Yukos felt justified in forcing Respondent, through Rosneft, to pay the Western Banks under the YNG guarantee, rather than paying the debt itself.

1144. The Tribunal therefore cannot accept Respondent’s argument that because Yukos, even after the seizure of YNG, could have paid the Western Banks under the A Loan but did not do so, there is no link to be made between Rosneft (and, indeed, Respondent) and the bankruptcy. The big picture established by the record, including in respect of the tax assessments and the auction of YNG, suggests otherwise.

1145. The Tribunal’s conclusion is also supported by two particular facts more closely related to the enforcement of the A Loan in Russia.

1146. Firstly, the Tribunal notes that the Western Banks entered into the Confidential Sale Agreement with Rosneft very soon after the Federal Arbitrazh Court for the Moscow District reversed an earlier decision that had authorized the enforcement of the English Judgment, and that the same Court ultimately allowed the Western Banks to proceed with its enforcement after it had entered into the Confidential Sale Agreement. This suggests to the Tribunal, at best, a very happy coincidence as between the decision of the Court and the interests served by the terms presented to the Western Banks in the Confidential Sale Agreement. It is also consistent with

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Claimants’ argument that the decisions of the Court and the conduct of Rosneft were being coordinated as part of a deliberate strategy to drive Yukos into bankruptcy.

1147. Secondly, if Rosneft itself (or the State, as its owner) were not interested in orchestrating the initiation of the bankruptcy proceedings against Yukos, why was the requirement to initiate bankruptcy included in the Confidential Sale Agreement? In other words, while the Tribunal can accept both that the Western Banks had a commercial interest in getting paid by Rosneft (especially after the 5 December 2005 decision of the Federal Arbitrazh Court that reversed the enforcement of the English Judgment) and that Rosneft had a commercial interest in having the Western Banks’ claim against Yukos assigned to it in exchange for such payment, the Tribunal does not see any evident commercial rationale for the inclusion in the Confidential Sale Agreement of the requirement that the Banks initiate bankruptcy in order to be paid.

1148. It thus appears to the Tribunal that the Western Banks, since Yukos was not reimbursing the loan, were actively “encouraged” to enter into the Confidential Sale Agreement in order to accomplish their objective of being paid. While, as the Tribunal said earlier, Yukos must shoulder some of the blame for not paying the Western Banks and thereby increasing its exposure to the risk that it could be petitioned into bankrupcy, it appears undeniable to the Tribunal that initiating bankruptcy was not a goal of the Western Banks, but rather the objective of Rosneft, in the interests of its owner, the Russian Federation. The Tribunal concludes that in the end the bankruptcy was initiated by the Russian Federation. The separate and parallel bankruptcy petition filed by Rosneft-controlled YNG on 24 March 2006 reinforces this conclusion.

1149. The Tribunal, in light of the evidence reviewed above, finds the following passage from Claimants’ Post-Hearing Brief compelling and adopts it as its own:

The only rational explanation for the highly unusual manner in which the bankruptcy proceedings against Yukos were initiated was to act as a cover for the Russian Federation’s involvement, allowing the Russian government to keep its word—in the context of ongoing legal proceedings, including these arbitrations—that it was not interested in the bankruptcy of Yukos (and thus maintaining the appearance that it was commercial

parties—not the State—that sought Yukos’ bankruptcy), while achieving its desired end.1448

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(b)Were the Bankruptcy Proceedings Conducted Properly and Fairly?

1150. Claimants paint the bankruptcy as “the final act of the destruction” of Yukos.1449 Claimants argue that Respondent (or entities whose conduct is attributable to Respondent)1450 not only initiated the bankruptcy, but also (i) ensured that it monopolized the bankruptcy process by discriminatory rejection and allowance of bankruptcy claims; 1451 (ii) ensured the rejection of Yukos’ proposed Rehabilitation Plan;1452 and (iii) confiscated the residual assets of Yukos through sham auctions and Yukos’ eventual liquidation.1453

1151. Claimants claim that Respondent monopolized the bankruptcy and, directly or indirectly, obtained 97.67 percent of all bankruptcy claims, obtained approximately 93.87 percent of the votes in the creditors’ meeting, claimed USD 6 billion in profit tax on the auction proceedings, acquired over 95 percent of Yukos’ remaining assets in the bankruptcy, and received as creditor approximately 99.71 percent of the bankruptcy proceeds.1454

(i)The Courts’ Treatment of Bankruptcy Claims

1152. Claimants argue that the Russian courts never had the interests of Yukos or its rehabilitation in mind when conducting the bankruptcy proceedings. Firstly, the Russian courts ensured that the Russian State would become Yukos’ main creditor in the bankruptcy proceedings by postponing the date of the first meeting of Yukos’ creditors to give the State “more time to prove new tax claims” against Yukos.1455 These tax claims comprised Yukos’ outstanding alleged tax liabilities for the years 2000 to 2003. As noted above, at the hearing of the Moscow Arbitrazh Court on 14 June 2006, the bankruptcy judge ruled in favour of the Federal Taxation Service, setting “a new speed reading record” after taking just 15 minutes to consider 127,000 pages of information submitted by Russian tax officials.1456 As a result of that judgment, the

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Federal Taxation Service became Yukos’ single largest creditor with registered claims amounting to approximately USD 13.06 billion.1457

1153. Secondly, Claimants contend that the Russian courts ensured that State-controlled Rosneft—of which the Russian State has been the majority shareholder since the company’s privatization in the nineties—would become Yukos’ second largest creditor in the bankruptcy. On 17 July 2006, the Moscow Arbitrazh Court admitted into the bankruptcy proceedings four claims by YNG, which by that that time had already become a subsidiary of Rosneft:

The claims were based on the sale of oil produced by Yuganskneftegaz and sold to Yukos’ trading companies in 2004: the Court decided that Yukos, and not the trading companies—notwithstanding that those companies were Yuganskneftegaz’s counterparties under the relevant oil sale contracts—was liable to pay for the oil sold.1458

1154. Thirdly, in Claimants’ view, the Russian courts ensured that creditor claims belonging to Yukos-related entities or to Yukos’ shareholders would not be recognized in the bankruptcy proceedings. For example, in its Memorial on the Merits, Claimants explain the Russian courts’ treatment of Moravel Investment Limited, a GML affiliate:

This was the case, for example, for the claim filed by Moravel Investment Limited (“Moravel”), a GML affiliate, on the basis of an LCIA award of September 16, 2005, rendered by an arbitral tribunal comprised of Peter Leaver QC, Jonathan Hirst QC and J. William Rowley QC, Chairman. The award ordered Yukos to pay to Moravel US$ 655,725,238.60 in principal plus corresponding interest, which was outstanding under the B Loan Agreement concluded between Yukos and Société Générale in September 2003 for the purposes of Yukos’ merger with Sibneft. This loan was identical, in all material aspects, to the A Loan which had been assigned to Rosneft by the Western Banks headed by Société Générale and on the basis of which Rosneft had been admitted into the bankruptcy proceedings. However, unlike Rosneft’s claim, for which the Russian courts had recognized the English Judgment rendered in favor of the Western banks (later

assigned to Rosneft), the courts refused the enforcement of the awards in favor of Moravel.1459

1155. Russian courts accorded similar treatment to the remaining Yukos affiliates with outstanding claims against Yukos, such as Yukos Capital SARL, Glendale Group Limited, OOO Yu-Mordovia, OOO Yukos Vostok Trade, ZAO Yukos-M, OOO Siberian Internet Company, OOO Trading House Yukos-M, ZAO Krasnoyarskgeofizika, ZAO Lipetsknefteprodukt, and

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OOO Alta-Trade. As Claimants contend, “the common ground for denying the claims of these companies was the alleged lack of evidence of the existence of the claims.”1460

(ii)The Rejection of Yukos’ Rehabilitation Plan

1156. On 1 June 2006, Yukos’ general shareholders’ meeting approved Yukos’ Financial Rehabilitation Plan and appointed Mr. Osborne as the shareholders’ representative in the bankruptcy proceedings.1461 Claimants point out that according to Yukos’ Rehabilitation Plan, Yukos was in a position to pay off its alleged liabilities fully within two years.1462 Mr. Rebgun, the appointed administrator, was required to circulate Yukos’ Rehabilitation Plan to all Yukos’ registered creditors. According to Claimants, Mr. Rebgun did not do so, although Respondent alleges that Mr. Rebgun made the Rehabilitation Plan available for the creditors’ review before the creditors’ meeting.

1157. Mr. Rebgun’s own proposal to the creditors was to sell all Yukos’ assets to satisfy the creditors’ claims and then liquidate the company. At the creditors’ meeting of 25 July 2006, at which the Federal Taxation Service and Rosneft held 93.87 percent of votes, Yukos’ Rehabilitation Plan was rejected, and the creditors decided to liquidate Yukos, “which had the added bonus of creating an additional claim for the tax authorities of 24% profit tax on the auction proceedings, a claim on which it would collect US$ 6 billion.”1463

1158. In their Post-Hearing Brief, Claimants further contend that:

During the hearing, the Respondent made a limited number of unfounded attacks on Yukos’ Financial Rehabilitation Plan. For example, the Respondent alleged that Yukos’ Financial Rehabilitation Plan was “highly speculative” as the “cash pool” was to be funded from “uncertain revenues” including US$ 18 billion from “litigation claims.” However, as even the most cursory review of the Plan reveals, “litigation claims” were not ascribed a value in determining the aggregate value of Yukos’ assets available to pay claims and were merely intended to supplement the “cash pool”, if and when anything was received.1464

1159. Yukos’ creditors gathered for their first meeting on 20 July 2006. Yukos’ management proposed a Rehabilitation Plan1465 and Mr. Rebgun proposed its Analysis of Yukos’ Financial

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Situation.1466 After the meeting was adjourned and resumed on 25 July 2006, the Federal Taxation Service, representing together with Rosneft 93.87 percent of the votes, voted against the Rehabilitation Plan and in favor of the liquidation of Yukos.1467

1160. Claimants argue that the decision to liquidate was “preposterou[s], even from an economic standpoint”1468 and that “[t]he absurdity of Yukos’ fate was only the flip side of the coin of the Russian Federation’s and Rosneft’s fortune.”1469 Claimants allege that there was an “obvious conflict of interest” in the vote as the sales of Yukos’ assets were subject to a 24 percent profit tax, “which meant that liquidation would bring an enormous windfall to the Federal Taxation Service”.1470

1161. Respondent denies all allegations of impropriety in relation to Mr. Rebgun’s conduct of the creditors’ meeting and the rejection of Yukos’ Rehabilitation Plan:

All registered creditors and the representatives of the debtor had an opportunity to review the Rehabilitation Plan and the analysis of Yukos’ financial situation (along with relevant

enclosures) prepared by Mr. Rebgun at his offices during the week preceding the meeting (and for five full days, from July 20, 2006 until July 25, 2006).1471

1162. Respondent contends that the Rehabilitation Plan was rejected because it was flawed and overly optimistic:

Yukos’ management, actively supported by the Claimants, had the opportunity to present a rehabilitation claim to the meeting of creditors. The rough outline management submitted was, however, legally defective and did not provide any basis for creditors to prefer rehabilitation to liquidation. It was not properly presented to or approved by Yukos shareholders, did not meet the legal requirements that the company’s tax claims be satisfied within six months, and did not ensure full, let alone timely, payment of Yukos’ creditors’ claims.1472

1163. Respondent argues that the Rehabilitation Plan was “a blatant and untenable attempt on the part of the Oligarchs to secure their own interests over those of the creditors” and that “the

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creditors’ decision to reject the plan was reasonable and taken in accordance with Russian law, which vests full discretion with the creditors, consistently with international practice.”1473

1164. Respondent underlines that in Russia, “the vote for the liquidation or rehabilitation of the debtor is within the full discretion of the creditors.”1474

1165. On the question of the late claims, Respondent does not contest that the Federal Taxation Service claimed USD 8.82 billion in profit taxes out of the proceeds of the bankruptcy and eventually received USD 6.02 billion; it submits however, that “[t]hese are standard ‘late’ claims that arise in connection with any sale generating profits, including in the context of rehabilitation proceedings”1475 and that there is therefore nothing improper about them.

(iii)The Declaration of Yukos’ Bankruptcy

1166. On 1 August 2006, the Moscow Arbitrazh Court stated that it had “established that the debtor showed the signs of bankruptcy as defined in Article 3 of the Federal Law ‘On Insolvency (Bankruptcy)’” and that Yukos had “not fulfilled its monetary obligations towards its creditors for three months from the time when these obligations should have been fulfilled,” without making any reference to the difference between Yukos’ liabilities and its assets.1476

1167. The Claimants assert that on 1 August 2006, when Yukos was declared bankrupt, “Yukos’ assets exceeded its alleged liabilities, and . . . the Company was clearly solvent.”1477 The Claimants further suggest that “there was nothing inevitable about the bankruptcy of Yukos” and that “Yukos could have avoided bankruptcy if allowed to pay off its fabricated tax debts.”1478 To support this claim, Claimants refer to the Rehabilitation Plan proposed by Yukos’ management, which proposed “to leave intact Yukos’ ‘core assets’ as a viable ongoing company, while addressing and paying in full all valid creditors’ claims.”1479

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